Islamabad: The steel industry in Pakistan has urged the State Bank of Pakistan (SBP) to consider reducing interest rates in the upcoming Monetary Policy meeting, according to news published on October 25. As per the sources, the industry is sounding an urgent alarm warning of potentially severe consequences for the nation’s economy.
Read:Steel prices’ dip continues with PKR strengthening against USD In a letter addressed to relevant ministries, the Pakistan Association of Large Steel Producers (PALSP) underlines the pivotal role played by the steel industry in Pakistan’s economic landscape. This industry directly employs over 300,000 individuals and serves as a robust support system for various downstream sectors, influencing a significant 7.5 million jobs across multiple industries. However, this vital industry faces an unprecedented liquidity crunch resulting from a combination of reduced working capital and weakened purchasing power, primarily due to substantial capital requirements. This dire situation has already led to the closure of numerous small to medium-sized steel mills, causing substantial job losses. If the persistently high-interest rates continue, the sustainability of the steel industry is at risk, potentially triggering a significant national unemployment crisis that demands immediate attention from the SBP and the government. At present, the SBP’s key interest rate stands at 22%, a level unseen since early 2011. This rate exceeds those of many other countries, rendering Pakistan’s domestic steel industry uncompetitive. While Pakistan’s central bank maintains an interest rate of 22% for industries, neighbouring countries enjoy significantly lower rates, such as 6.5% in India, 3.45% in China, 6.5% in Bangladesh, 2.5% in Thailand, 6% in Indonesia, 3.65% in Vietnam, 10% in Sri Lanka, 1.875% in Taiwan, and 3% in Malaysia.
Read:Steel bar prices drop, construction sector gets much-needed relief These high-interest rates make it exceptionally challenging for the steel industry to access credit from financial institutions, leading to stalled expansions and discouraging steel manufacturers from further investments. Consequently, the once-promising growth of existing industries has come to a standstill. A recent report by JS Global underscores the need for action, stating, ‘Based on a 12-month forward CPI, real interest rates have turned positive since September 2023 and are expected to experience a significant expansion with the current Policy Rate at 22%. In the absence of negative CPI surprises, the SBP has an opportunity to initiate monetary easing sooner than anticipated.’ Looking ahead, the next 12 months’ CPI is projected to average at 19%, resulting in a positive real effective interest rate of 300 basis points by January 2024. In light of these developments, the SBP is urged to consider a substantial interest rate reduction of 500 basis points in the upcoming Monetary Policy Committee (MPC) meeting. PALSP Secretary General Wajid Bukhari emphasizes the urgency of the situation, saying, ‘Due to high-interest rates, the government of Pakistan’s debt servicing has surged to PKR 7.6 trillion, consuming the majority of the net income of the Federal Government. These rates are unsustainable, and the SBP must act promptly to create fiscal space for government infrastructure projects, crucial following the recent floods in Pakistan.’
Read:Tariffs on steel imports on cards: Commerce Minister Bukhari underscores the broader impact, stating, ‘The government must recognize the gravity of the crisis and implement immediate measures to support businesses and encourage investment in the country. Implementing business-friendly policies is not just about preserving jobs in the steel industry; it is essential for the overall economic well-being of Pakistan. The health of the steel industry directly affects the broader economy. Our policymakers must prioritize creating an enabling environment and formulating long-term policies to foster our local industries.’
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